Gold Stocks' Analysis and its Usefulness For Precious Metals Investors

By: Przemyslaw Radomski, CFA | Fri, Mar 5, 2010
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This essay is based on the Premium Update posted on March 5th, 2010.

In our previous essays we have covered the situation on the USD, gold and silver markets, but since there's more to the precious metals sector than just these two metals, we have decided to supplement the previous analysis by covering the precious metals stocks. If you are interested in trading gold and silver only, you might want to reconsider before clicking that X in your web browser's window - after all, precious metals stocks are highly correlated with the metals, and they even used to lead the metals in the past. Consequently, even if you are not interested in trading or investing in the PM stocks, you might still benefit by analyzing this part of the sector.

Let's begin commenting on the precious metals stocks, by analyzing the long-term chart of the HUI Index (charts courtesy of http://stockcharts.com.)

Two weeks ago we wrote the following:

The analysis of the long-term HUI chart suggests that gold stocks may need to move a little higher before forming a temporary top. In the past, local tops have been formed after HUI Index moved above the 50-day moving average, which hasn't been the case yet.

During the past several days, HUI Index has in fact moved above the 50-day moving average, which meant that one might expect a local top to be reached rather sooner than later. This was also one of the factors that we took into account before we decided to send out the Market Alert on Wednesday.

Moreover, the situation on the short-term chart suggests that a short-term resistance level has been reached.

Not only did the value of the GDX ETF move to the declining resistance level (blue line), but it also failed to confirm the breakout above the 38.2% Fibonacci retracement level (black horizontal line near 45.5.)

One of the ways in which a breakout can be confirmed is that the price breaks above a given level and then manages to stay there for at least three consecutive days. This has not been the case here so far. Additionally, the RSI indicator is near the 60 level and the last time that this was the case, we have seen a temporary top - in early January.

One of our unique indicators from the Premium Charts section is also suggesting that we are near a turning point, and so does the GDX:SPY ratio.

The GDX:SPY ratio measures the outperformance of PM stocks relative to other stocks. We have also featured the above chart in the December 4th 2009 Premium Update. Back then we wrote the following:

In the past the GDX:SPY ratio topped on a relatively high volume, and this is also what we have just seen. (...) The top in the above ratio is very likely to correspond to top in the PM stocks, and also to the top in the metals.

In the following days/weeks the value of the GDX:SPY ratio declined significantly along with prices of gold, silver and precious metals stocks. The high volume in this ratio has also accompanied the local top in the early January, and this is also what we have seen right now. Therefore, keeping a speculative (!) long position in the PM sector at this point does not seem to be a profitable decision.

Another part of the PM stock sector is created by the junior mining companies. As far as juiors are concerned - and as we explained in the January 15th Premium Update - we currently don't recommend owning juniors with a large part of your capital because of their very high correlation with the general stock market and the bearish situation on the latter.

Back then we wrote that if you are risk averse, switching from juniors into physical gold/silver, seems to be a good idea, which turned out to be a good call.

The value of the GDNX:GLD ratio has moved lower since the mid-January. CDNX (the Toronto Stock Exchange Venture index) is commonly used as a proxy for juniors. It consists of about 500 largest stocks listed on that particular exchange, most of which are junior mining companies.

The situation has somewhat calmed down meaning that the ratio has been trading sideways in February, but we have not seen any sings that would suggest that it is safe to move into juniors with a large part of one's capital.

Summing up, signals coming from the analysis of the PM stocks' charts currently don't give us very precise signals, which may mean that they are to trade sideways for some time instead of making a sharp move in any direction, but there are other signals, such as the one included in this week's free commentary that suggest that we may be near a local top.

As far as the target for the decline (if one does materialize) is concerned - it is too early to say. We will keep our Subscribers updated and get back to this topic once we have more information.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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